‘An ele­phant start­ing to run’

When Don­ald Trump, who is no stranger to Twit­ter hy­per­bole, de­scribes a meet­ing with an­other world leader as “hope­fully his­toric,” it’s hard not to con­sider it a case of damn­ing with faint praise. But that’s the way he de­scribed his talks with Xi Jin­ping, China’s pres­i­dent, in Ar­gentina at the G20 sum­mit last week. And no won­der. Days after the sum­mit, what kind of trade truce the two su­per­pow­ers ac­tu­ally struck seems to de­pend on which White House of­fi­cial you lis­ten to, which Chi­nese state-con­trolled me­dia out­let you read, or which way the wind is blow­ing. At best, it looks like the U.S. has agreed to with­hold rais­ing the tar­iff rate on US$250 bil­lion worth of Chi­nese im­ports for 90 days while ne­go­tia­tors try to work out a longert­erm deal. Hope­fully.

In any event, in­vestors who had been hop­ing for even a short-term respite from trade jit­ters — and the gath­er­ing storm of global eco­nomic gloom — didn’t get much of one from the G20. And un­til there’s clar­ity, wor­ries over China’s eco­nomic growth won’t di­min­ish. The In­ter­na­tional Mon­e­tary Fund’s fore­cast for GDP growth this year — 6.6 per cent — will al­ready be the low­est mark since 2001, when China joined the World Trade Or­ga­ni­za­tion. If next year’s IMF pro­jec­tion — re­vised down to 6.2 per cent in Oc­to­ber, in part thanks to the Trump tar­iffs — proves ac­cu­rate, the China slow­down will be even more se­vere. From 2000 to 2014, China’s av­er­age an­nual growth was 9.6 per cent; from 2015 to 2019, the av­er­age will be about 6.8 per cent.

With China slow­ing, where can the world turn in search of growth? Well, the man­tle of fastest-grow­ing big econ­omy now rests squarely on the shoul­ders of In­dia, which the IMF has dubbed “an ele­phant start­ing to run.” Now the sixth largest econ­omy in the world — sur­pass­ing France ear­lier this year, for what it’s worth — In­dia ac­counts for about 15 per cent of global growth. The IMF pegs In­dia’s fis­cal 2018/19 GDP growth (In­dia mea­sures GDP from April through to the fol­low­ing March) at 7.3 per cent, up from 6.7 per cent the pre­vi­ous year. The Re­serve Bank of In­dia is a lit­tle more op­ti­mistic, pre­dict­ing 7.4-per-cent growth this fis­cal and 7.5-per-cent in the first half of FY 2019/2020.

And there’s po­ten­tial for more, not only be­cause in the­ory, at least, In­dia should be rel­a­tively in­su­lated from ris­ing trade pro­tec­tion­ism. Its work­force is young, and about twothirds of the pop­u­la­tion is of work­ing age. With con­sis­tent fast growth, hopes are run­ning high that the coun­try’s mid­dle class will bloom — some es­ti­mates put it at more than a half-bil­lion peo­ple by 2025. For­eign multi­na­tion­als are re­port­edly pour­ing money into buy­ing up In­dian con­sumer prod­ucts as­sets, one of the rea­sons there have been more in­bound merg­ers and ac­qui­si­tions in In­dia than in China so far this year.

Beyond de­mo­graph­ics, the more busi­ness-friendly poli­cies of Naren­dra Modi’s BJP gov­ern­ment can also take credit for In­dia’s pace­set­ting growth. It in­tro­duced a lon­gover­due goods and ser­vices tax last year, and tack­led black money in 2016 with its con­tro­ver­sial de­mon­e­ti­za­tion scheme. Crit­ics have rightly charged that the im­ple­men­ta­tion of both was botched, but let’s face it: in a coun­try as po­lit­i­cally, so­cially and eco­nom­i­cally com­plex as In­dia, no good will ever be im­ple­mented with­out some de­gree of botch.

So is now the time for Western in­vestors and busi­nesses to turn to In­dia? The po­ten­tial is huge, of course, but so are the chal­lenges.

For in­vestors specif­i­cally, In­dian stocks, which are trad­ing at al­most 20 times earn­ings, are hardly cheap by emerg­ing mar­ket stan­dards. And there are risks to the growth ex­pec­ta­tions un­der­pin­ning that val­u­a­tion.

One of them is po­lit­i­cal. A gen­eral elec­tion will be held next spring, and Modi’s re-elec­tion is far from as­sured. The ru­pee has been bat­tered this year as the dol­lar has soared, mean­ing that In­di­ans are pay­ing more, es­pe­cially for fuel. On that note, while in­fla­tion has re­mained largely in check by In­dian stan­dards, the coun­try is a heavy im­porter of en­ergy — if prices rise dra­mat­i­cally, so will in­fla­tion. Eco­nomic growth has been strong, but in­come in­equal­ity seems to be on the rise.

An­other nega­tive is that In­dia re­mains a very dif­fi­cult place to do busi­ness, de­spite Modi’s at­tempts at some re­form. Labour laws and ret­ro­spec­tive taxes drive for­eign com­pa­nies into fits. The bank­ing sys­tem re­mains frag­ile and sad­dled with bad debts. Cor­rup­tion and slow-mov­ing bu­reau­cracy are con­stant road­blocks. So is the ju­di­ciary. The gov­ern­ment at long last has in­tro­duced a rea­son­able bank­ruptcy law that com­bats the im­punity with which con­trol­ling share­hold­ers can re­nege on cor­po­rate debts — leg­is­la­tion that could go a long way to im­prov­ing bank bal­ance sheets — but pro­ceed­ings in some high-pro­file cases so far have been mired down in the courts, whose back­logs are huge.

And fi­nally, the big­gest chal­lenge to In­dian growth might be growth it­self. In or­der to cap­i­tal­ize on its de­mo­graphic po­ten­tial, the coun­try re­quires mas­sive in­vest­ments in ed­u­ca­tion, in­fra­struc­ture and tech­nol­ogy to build ca­pac­ity. Where will the money come from? Open­ing up to for­eign in­vest­ment is key, and Modi has made some head­way to do so, but it’s not clear it’s work­ing: growth in for­eign di­rect in­vest­ment hit its slow­est pace in five years this sum­mer.

FILE PHOTO

Shop­pers ride es­ca­la­tors at a mall in Mum­bai, In­dia. The IMF pegs In­dia’s fis­cal 2018/19 GDP growth at 7.3 per cent, up from 6.7 per cent the pre­vi­ous year.